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Tags: EU | Greece | Cut | Deficit

EU Expected to Give Greece Until 2012 to Cut Deficit

Tuesday, 02 February 2010 12:23 PM EST

The European Commission will endorse on Wednesday a Greek plan to cut its budget deficit below the EU ceiling of 3 percent of GDP by the end of 2012 and introduce reforms to keep public finances stable.

The Commission's assessment will be closely watched by financial markets as they weigh Greece's credibility as a debtor.

Sharp upward revisions to Greek deficit and debt figures last year led to ratings downgrades and sent yields soaring.

The Commission's much-anticipated assessment is likely to be in line with what Greece itself has promised to do in its long-term deficit cutting plan, which forecasts a deficit of 2.8 percent in 2012, down from 12.7 percent in 2009.

"What we are saying to the Greek authorities is: your stability program has established ambitious targets and objectives and we fully endorse these ambitious objectives," EU Economic and Monetary Affairs Commissioner Joaquin Almunia told Reuters on Monday, giving cautious approval.

The Commission, the EU's executive arm, will formally present its recommendations on Wednesday and they will then be sent for the approval of EU finance ministers on Feb. 15-16.

"We consider that the achievement of these objectives in the coming three years, before the end of 2012, is absolutely necessary," Almunia told Reuters.

"These objectives are achievable but they are surrounded by risks."

Whether the Greek program works has become a measure for stability across the European Union and especially the 16 countries that use the 10-year-old euro single currency.

Any sense that Greece's recovery program isn't going to work or that Athens needs rescuing by other euro zone members will put more pressure on Greek finances and could lead to problems in other euro zone countries with large deficits.

Almunia said Wednesday's Commission assessment would ask Athens to implement all the measures it has already outlined in its stability program, including spending cuts, revenue increases and structural reforms to labor markets.

The Commission is also likely to raise doubts about Greek growth forecasts, an EU source said.

If growth turns out to be lower than expected, the Commission could ask Greece for additional measures to compensate for the shortfall.

Greece has been pounded by financial markets since revealing its 2009 budget deficit was more than four times the EU ceiling.

Investors were also alarmed by Commission findings that Greek statistics were unreliable and prone to political influence.

The premium investors’ demand for holding Greek debt rather than more reliable German Bunds hit a lifetime high of around 400 basis points last Thursday, leading to fears of a spillover that could engulf countries such as Spain and Portugal.

In an effort to get its financial house in order, Greece has made a serious of promises, including plans to cut public sector wages, impose a public-sector hiring freeze, change the tax scale and fight tax evasion.

But there is reluctance in some parts of the Socialist government to implement all the measures, fearing a popular backlash. Strikes are already planned.

A draft bill on the new tax system is expected to be presented this month and is likely include higher taxes on real estate transactions among other things, but no VAT hike.

Greece also plans a pension system reform because it is the EU country whose public finances are most at risk form an aging population.

Unless it changes the current system, it could be spending a quarter of its GDP on pensions by 2060.

As well as its assessment of Greece's plans, the Commission will also on Wednesday issue a warning to Greece about its policies in areas other than budget reform, using powers given to it by the EU's Lisbon reform treaty for the first time.

Warnings can be issued to countries whose economic policies are not consistent with EU guidelines, or countries which risk jeopardizing the proper functioning of the euro zone.

The Commission will launch infringement proceedings against Greece for sending false statistics and later also demand auditing powers for the EU statistics office Eurostat to be able to check the accuracy of such data in the future.

© 2023 Thomson/Reuters. All rights reserved.

The European Commission will endorse on Wednesday a Greek plan to cut its budget deficit below the EU ceiling of 3 percent of GDP by the end of 2012 and introduce reforms to keep public finances stable. The Commission's assessment will be closely watched by financial...
Tuesday, 02 February 2010 12:23 PM
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